28 April, 2016

Newly independent Greece had an odious debt round her neck

Since
2010, Greece has been the centre of attention. Yet this debt crisis,
mainly the work of private banks, is nothing new in the history of
independent Greece. The lives of Greeks have been blighted by major
debt crises no less than four times since 1826. Each time, the
European powers have connived together to force Greece to contract
new debts to repay the previous ones. This coalition of powers
dictated policies to Greece that served their own interests and those
of a few big private banks they favoured. Each time, those policies
were designed to free up enough fiscal resources to service the debt
by reducing social spending and public investment. Thus Greece and
her people have, in a variety of ways, been denied the exercise of
their sovereign rights, keeping Greece down with the status of a
subordinate, peripheral country. The local ruling classes complied
with this.

This
series of articles analyses the four major crises of Greek
indebtedness, placing them in their international political and
economic context – something which is systematically omitted from
the dominant narrative and very rarely included in critical analysis.

by Eric
Toussaint

PART 1 -
How did the loans work?

To fund the
independence war it waged against the Ottoman Empire from 1821 and to
establish the new state, the provisional government of the Hellenic
Republic contracted two loans from London, one in 1824 and the other
in 1825. Bankers in London, by far the biggest financial centre in
the world at the time, hastened to set up the loan, seeing it as a
means of making a huge profit.

Internationally,
the capitalist system was in full speculative phase which, throughout
the history of capitalism, has generally been the final phase of a
period of strong economic growth preceding a backlash. That backlash
takes the form of bursting speculative bubbles and then a period of
depression and/or slow growth. Bankers in London, followed by those
of Paris, Brussels and other European finance centres, were in a
frenzy to invest the enormous amounts of liquidity at their disposal.
Between 1822 and 1825, London bankers ‘harvested’ £20 million
sterling on behalf of leaders of the newly independent Latin-American
countries (Simón Bolívar, Antonio Sucre, Jose de San Martín and
more) to finalize their independence struggle against the Spanish
crown. The two Greek loans of 1824 and 1825 came to a total of £2.8
million, i.e. 120% of the country’s GDP at the time.

Both in the
case of Greece and in that of the young revolutionary independent
governments of Latin America, the new states were barely emerging and
did not yet have international recognition. Spain was opposed to
European states giving financial support to the fledgling
Latin-American ones. After all, it could reasonably be supposed, at
the time, that the independence struggles were not completely over.
Lastly, loans were being granted to republics whereas hitherto only
monarchies had been admitted to the club of sovereign borrowers.

All that
goes to show just how eager bankers were to take financial risks.
That banks would lend 120% of a country’s entire annual product to
the provisional government of a Greek state only just emerging under
wartime conditions is a clear indication of a reckless desire to make
juicy profits. Alongside the bankers, big industrial and commercial
companies also supported this craze, as the amounts loaned were
largely going to be used by the borrowers to buy the new armies
weaponry, uniforms and equipment of every sort from the United
Kingdom.

How did
the loans work?

London
bankers issued sovereign bonds in the name of the borrower states and
sold them on the stock-exchange in the City. Most of the time, bonds
were sold for less than their face value (see the illustration of an
1825 bond worth £100). Thus each bond issued on Greece’s account
for a face value of £100 was sold for £60. This meant that Greece
obtained less than £60, once a hefty commission had been deducted by
the issuing bank against an IOU of £100. This explains why for a
loan valued at £2.8 million, Greece only received payment of £1.3
million. Two further important facts: if the interest rate on the
Greek bonds was 5%, it was calculated on the face value so the Greek
government had to pay £5 a year to the bearer of a bond valued at
£100, which was an excellent deal for him or her, bringing a real
profit of 8.33% (and not 5%). On the other hand, for the borrower
state, the cost is exorbitant. In the case of Greece, the government
received £1.3 million but had to pay interest each year on the £2.8
million ostensibly borrowed. That was not sustainable.

In 1826, the
provisional government suspended debt payments. Studies of this
period generally explain the suspension by the high cost of military
operations and the continuing conflict.

In fact, the
causes of Greece’s default were not only internal; international
factors, beyond the control of the Greek government, also played a
very important role. For one thing, the first great global crisis of
international capitalism began in December 1825, with the bursting of
the speculative bubble created in the London stock-exchange over the
previous years. That crisis caused a fall in economic activity,
bringing down numerous banks and creating an aversion to risk.
Starting in December 1825, British bankers, followed by other
European bankers, ceased making foreign and domestic loans. The new
states, expecting to finance their debt payments by taking out fresh
loans in London or Paris, could no longer find any bankers disposed
to lend. The 1825-26 crisis affected all the finance centres of
Europe: London, Paris, Frankfurt, Berlin, Vienna, Brussels,
Amsterdam, Milan, Bologna, Rome, Dublin, Saint Petersburg, and the
list goes on. There was an economic depression and hundreds of banks,
traders and manufacturing companies went bankrupt. International
trade fell through the floor. Most economists consider the 1825-26
slump to be the first of the great cyclic crises of capitalism.

When the
crisis broke in London in December 1825, Greece and the new
Latin-American states continued to repay their debts. However in the
course of 1826, several countries – Greece, Peru and Great Colombia
which included Colombia, Venezuela and Ecuador – were obliged to
suspend repayments. This was partly due to banks refusing to grant
new loans, and partly because states’ revenues were adversely
affected by the deterioration of the economic situation, and
particularly international trade. By 1828, all the independent
Latin-American countries, from Mexico to Argentina, had suspended
payments.

In 1829, the
provisional Hellenic government made their London creditors an offer
to resume payments, on condition that the debt be reduced. The
creditors refused, demanding 100% of the nominal value; no agreement
was reached.

From 1830
on, three of Europe’s major powers – the United Kingdom, France
and Russia – formed the first Troika in modern Greek history and
decided to establish a monarchy in Greece with a German prince at its
head. Negotiations began over which prince to choose: Leopold of
Saxe-Coburg Gotha, Prince Otto of Bavaria or someone else? Finally
Leopold was placed on the throne of Belgium which became an
independent state in 1830 and the Bavarian prince, Otto von
Wittelsbach, was chosen to be the King of Greece. At the same time,
the three great powers agreed to give their support to British and
other European banks which, through them, bought Greek bonds. The
idea was also to exert pressure on the new Greek state to get full
reimbursement of the loans of 1824 and 1825.